Low-Tax States, Led By Texas, Outpace Job Growth In High-Tax States By 71%

By Chuck DeVore. Excerpt:

"One important aspect of the 2017 tax law was its limitation of the State and Local Tax (SALT) deduction for filers who itemize their individual income taxes. The new tax code limits the SALT deduction to $10,000 per household, reducing the federal subsidy of state and local taxes. As a result, the federal tax law change acted to change the relative tax burden at the state level as if all 50 states adjusted their tax rates at once. So while most taxpayers received a federal tax cut, some higher income earners in high-tax states like California saw a smaller tax cut than their counterparts in low-tax states like Texas. A select few, however, saw an increase in their overall tax burden.


Since businesses with fewer than 100 workers employ 57% of the U.S. workforce and a large share of these firms are organized as sole proprietorships (where the small business owner pays personal income taxes instead of corporate income taxes), it stands to reason that the new tax law’s limitation on the SALT deduction may have an effect on job growth at the state level. This is likely because the ability to make and keep more of the money you earn is even more affected by the taxes in your home state.

The monthly state level jobs data supports the theory that the tax law has fundamentally altered the tax incentive environment at the state level. This is clear when looking at the 50 states and separating them into three tax levels, each having about the same employment base. Looking at the average itemized SALT deduction in 2014, there are 19 low-tax states, 21 medium-tax states, and 10 high-tax states.

Since the Trump tax cut in December 2017, private sector job growth has been 70.5% higher in the low-tax states than in the high-tax states through November 2018.

States Grouped by State & Local Tax Burdens		Average SALT Deduction Claimed in 2014	Private Sector Jobs (seasonally adjusted in 000s)		Comparative Employment Growth Dec. 2017 to Nov. 2018
States	Tax Burden		December 2017	October 2018	Growth Rate	Low-Tax Job Rate vs. Other
19	Low	$6,889	42,433	43,561	2.66%	-
21	Average	$9,710	41,418	42,104	1.66%	60.3% Higher
10	High	$15,000	40,455	41,086	1.56%	70.5% Higher

Before the tax cut, job growth in the low-tax states was marginally higher than in the high-tax states over the prior two years.

The table below shows private sector job growth from December 2017 to November 2018 in the three most-populous states in each tax category. The three most-populous low-tax states do not have a personal income tax.

Low Tax	Job Growth %
Texas	3.37%
Florida	2.98%
Washington	3.18%
Medium Tax
Pennsylvania	1.14%
Ohio	2.24%
Georgia	2.29%
High Tax
California	1.65%
New York	1.32%
Illinois	0.76%

Nationwide, the rate of private sector job growth over the past 11 months was 2%. Of the 19 low-tax states, 13 experienced job growth at or above the national average. Among the 21 medium-tax states, seven saw faster job growth than the nation as a whole. With the ten high-tax states, however, only two, Oregon and Maryland, added jobs at a faster rate than did the nation.

In Oregon’s case, that state was at the lowest end of claimed SALT deductions, with an average of only $11,800, compared to $21,000 in New York. Further, relative to California’s very high taxes, Oregon’s tax burden seems a comparative bargain, leading many Californians to make the move north. As for Maryland, it, along with Virginia, a mid-range state for taxes, both continue to benefit from the growth of the federal contractor workforce in the greater Washington, D.C. area.

Along with the incoming House Speaker Rep. Nancy Pelosi (D-CA), many Democrats (especially those representing high-tax states) would like to repeal the $10,000 cap on SALT deductions, even though an analysis by a left-of-center think tank determined that 56.5% of the tax break would accrue to households in the top 1% of income."